PIIGS trample energy prices

Sam FletcherOGJ Senior WriterEnergy prices flopped with crude down 5% for its biggest 1-day loss in 6 months Feb. 4, then tumbled below $70/bbl to a 7-week low before “bottom pickers” bid prices back above $71/bbl Feb. 5 on the New York market, amid growing global concern that the weak economies of Portugal, Ireland, Italy, Greece, and Spain (PIIGS) may undermine Europe’s recovery from the recession.

That’s because of the high percentage of public debt to gross national product in those countries. Reuters published estimates of 77.4% for Portugal, 64.5% Ireland, 115% Italy, 113.4% Greece, and 53.4% Spain. Greece is seen as the weakest link in the eurozone, and there is fear it will default on its public debt. As a result, sovereign debt is no longer viewed as a riskless asset in financial markets. Many observers expect rating agencies to downgrade the credit ratings of PIIGS countries this year.

As a result, investors were pulling money out of higher risk energy and equity commodities for the safe haven of the strengthening US dollar, with the euro at its lowest level since late May. “The dollar index had been under pressure for most of the second half of 2009, but continued concerns about the stability of the eurozone are making the dollar regain its value as king of currencies,” said Olivier Jakob at Petromatrix, Zug, Switzerland. “The dollar index is now at the highest level since July of last year and on the euro correlation model, West Texas Intermediate remains overbought by about $10/bbl, given that the dollar index continued to rise as WTI was falling.”

In New Orleans, analysts at Pritchard Capital Partners LLC said, “The overall market price action in conjunction with a stronger US dollar and weaker commodities suggest that the long-term outcome of the current economic crisis is one of low growth and minimal inflation. The 200-day moving average for the front month crude contract is approximately at $70.50/bbl, and this level should provide reasonable support for crude. Crude has traded above its 200-day moving average since May of last year.”

Adam Sieminski, chief energy economist, Deutsche Bank, Washington, DC, said oil prices have remained relatively resilient in an environment of rising risk aversion. However, he warned, “This will not be able to persist . . . since a period of stronger oil prices is unlikely to be sustainable until global oil demand, including gasoline demand in the US, gets on more solid footing. US oil demand in January was still running at 2% below year-ago levels.”

Call home After months of silence, Nigerian President Umaru Musa Yar’Adua announced in early February he will surrender his office to Vice-President Goodluck Jonathan after he first reports by letter to the National Assembly about his extended visit to Saudi Arabia.

Yar’Adua dropped out of public sight Nov. 23 when he left Nigeria for medical treatment at the King Fahd Hospital in Jeddah. Silence on his condition and prognosis prompted rumors he was in a coma, brain-damaged, or dead. This caused a political crisis in Africa's most populous nation and biggest oil producer since Yar’Adua did not hand over authority to his vice-president before leaving.

Meanwhile, a government amnesty program for rebels in the oil-producing Niger Delta stalled amid lack of progress on promised reforms that would allocate more federal revenues to that area. That prompted an announcement by the militant Movement for the Emancipation of the Niger Delta that it was ending a 3-month cease-fire. However, Jakob at Petromatrix said, “It is difficult to assess what is the current status of the MEND following last year’s amnesty.”

Yar’Adua’s colleagues in the Peoples' Democratic Party earlier issued an ultimatum for him to contact government officials. They extended the deadline to Feb. 15, pending his promised letter. Meanwhile, PDP senators said they will not accept executive communications from Jonathan as vice-president.

Shortly before Yar’Adua announced he would step down, analysts at the Centre for Global Energy Studies, London, said, “The situation in Nigeria is becoming more precarious, and the fragile peace between the militant groups operating in the Niger Delta and the federal government looks to be rapidly unraveling.” As a result, they said, “The possibility of disrupted supplies from Nigeria is perhaps already being priced into the March oil futures contract.”

On the other hand, Jakob said, “The vice-president is from the Delta, and a little unrest in the region would be the perfect excuse to accelerate the transition of power to Goodluck Jonathan who would then become the first Nigerian president from the Delta region.” (Online Feb. 8, 2010; author’s e-mail: samf@ogjonline.com)